Keep Your Hand in the Game
By Scott M. McCullough and Jeffrey D. Steed
May 9, 2009
The current economic crisis has created numerous horror stories about hard-earned wealth dissolving in an instant. Individuals and families once well-to-do are now seeking bankruptcy protection and trying to protect the assets they have accumulated.
It may be a builder over-extended in debt and unable to sell his inventory; a business owner whose personal assets are being sought by creditors; a doctor with higher insurance premiums to cover industry losses; a widow trying to preserve the proceeds of her deceased husband’s life insurance policy; or an entrepreneur whose debts far exceed revenue. In many cases personal assets have been pledged as collateral to secure obligations that for these and a myriad of other reasons cannot be repaid.
Some think asset protection is “hiding” or “transferring” assets to relatives and friends and misrepresents the extent of personal holdings. Unfortunately, such terrible economic circumstances breed creative methods to protect or transfer assets from creditors. And many of these strategies are illegal, not to mention unethical, and can produce drastic consequences.
The Right Move
Most states, including Utah, have now adopted the Uniform Fraudulent Transfers Act (UFTA). According to UFTA, any transfer made without receiving reasonable equivalent value and with the intent to hinder, delay or defraud any person with a claim is fraudulent and may result in the court voiding the transfer; attaching to the property; enforcing an injunction against further disposition of property; or appointing a receiver to take charge of the assets. Moreover, transfers that include fraud, such as omitting assets from applications or lying under oath, may constitute criminal action and carry jail time.
Asset protection however, can be done in advance of any problems, legally and ethically with professional planning strategies. However, it must happen with full disclosure and without intent to hinder, delay or defraud creditors.
The liability system that exists in the U.S. today is similar to a poker game, ruthlessly played. Individual entities are players at risk of losing their stakes in the game. The most dangerous players are, of course, those who have little to lose and everything to gain.
Invested chips are at risk and are often consumed in satisfaction of debt obligations, judgments, liens and other liability claims. Meanwhile, market factors serve as the unseen cards in the players hands, adding to the complexity and excitement of the game. Failing to “ante-up” can protect the chips withheld, but usually results in lost opportunity for potential gains.
But what if you could still play the game without investing your antes? In other words, what if you could still compete in the system without the risk of losing everything in the case of crisis? The field of asset protection is designed to do that¬—it allows the players to continue playing the game while shielding assets from risk.
There is no “one-size-fits-all” strategy for asset protection. The first line of defense are the protections provided by law such as retirement accounts, personal residence (up to $40,000 of equity), a myriad of personal property items and funds sufficient to subsist. Successful planning strategies may also include purchasing additional liability insurance (umbrella coverage), effectively titling assets between spouses and children or forming a business entity such as an LLC. Corporation assets may be shielded from the personal liability of the owners and assets of the owners may be shielded from company obligations by a corporate veil of protection. But that’s provided business owners give due respect to the legal formalities between their individual holdings and corporate entities.
Trusts can also protect assets when specifically created for such a purpose. An Asset Protection Trust, which can be established in certain states or in offshore locations such as the Cook Islands, are especially designed to shield assets from creditors of the grantors while still allowing the grantor of the trust to be a beneficiary. Independent trustees are appointed to invest, distribute and safeguard the contributed assets. Though not a new concept in offshore jurisdictions, it was not until 1997 that the first asset protection trust laws were enacted in the U.S.
In addition to shielding property of the grantor from creditors while still allowing the grantor to be a beneficiary, an asset protection trust can also protect and preserve the family’s financial legacy for generations (often called a Dynasty Trust).
Asset protection trusts allow individuals to continue enjoying and benefiting from their assets, without subjecting the assets to unnecessary risk. Though the costs of offshore trusts may be highly prohibitive to all but the very wealthy, even modest estates can often afford and benefit from the domestic alternatives.
Scott M. McCullough is an attorney with Callister, Nebeker & McCullough whose practice includes tax, estate and asset protection planning strategies. He can be reached at firstname.lastname@example.org
Jeffrey D. Steed is an attorney with Callister, Nebeker & McCullough whose practice includes a combination of tax, estate and asset protection planning strategies. He can be reached at email@example.com